Finance Question

ErrorGo is an U.S. firm and needs to pay 2,000,000 bank loan after one year and would like to hedge the exchange rate risk of euros. The company prefers adopting hedging strategies without initial cash outlays. The following annual money market rates are available: Deposit rate Borrowing rate U.S. 6% 7% Europe 8% 9% The spot exchange rate of the euros is US$1.10; the one-year forward rate of the euros is US$1.05. Alternatively, ErrorGo considers selling a put option with exercise price of US$1.12 for US$0.07 to Mirror Company. The contract value of the option is 2,000,000. If the expected future spot rate of euros on expiration date is US$1.10, calculate and explain briefly the total amount (in term of the U.S. dollars) that can be saved from the option hedge. (4 marks)